University of Oulu

Teirilä, J., & Ritz, R. A. (2019). Strategic Behaviour in a Capacity Market? The New Irish Electricity Market Design. The Energy Journal, 40(01). https://doi.org/10.5547/01956574.40.si1.jtei

Strategic behaviour in a capacity market? : the new Irish electricity market design

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Author: Teirilä, Juha1; Ritz, Robert A.2
Organizations: 1Department of Economics, University Oulu, Finland
2Judge Business School & Energy Policy Research Group, University of Cambridge, UK
Format: article
Version: accepted version
Access: embargoed
Persistent link: http://urn.fi/urn:nbn:fi-fe2021061838720
Language: English
Published: International Association for Energy Economics, 2019
Publish Date: 2021-10-15
Description:

Abstract

The transition to a low-carbon power system requires growing the share of generation from (intermittent) renewables while ensuring security of supply. Policymakers and economists increasingly see a capacity mechanism as a way to deal with this challenge. Yet this raises new concerns about the exercise of market power by large players via the capacity auction. We present a new modelling approach that captures such strategic behaviour together with a set of ex ante empirical estimates for the new Irish electricity market design (I-SEM) — in which a single firm controls 44% of generation capacity (excluding wind). We find significant costs of strategic behaviour, even with new entry: In our baseline scenarios, procurement costs in the capacity auction are around 150–400 million EUR (or 40–100%) above the competitive least-cost solution. From a policy perspective, we also examine how market power can be measured and mitigated through auction design.

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Series: Energy journal
ISSN: 0195-6574
ISSN-E: 1944-9089
ISSN-L: 0195-6574
Volume: 40
Issue: 1
Pages: 105 - 126
DOI: 10.5547/01956574.40.SI1.jtei
OADOI: https://oadoi.org/10.5547/01956574.40.SI1.jtei
Type of Publication: A1 Journal article – refereed
Field of Science: 511 Economics
Subjects:
Funding: This study is funded by the Fortum Foundation and the Strategic Research Council, Finland, Project No. 292854.
Copyright information: © 2019 International Association for Energy Economics. Published in this repository with the kind permission of the publisher.